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The Significant Impact of U.S. Oil Production

By: Frank Holmes | Monday, December 3, 2012

The Eagle Ford shale formation lies south of our headquarters in San Antonio,
Texas, giving the U.S. Global investment team a firsthand, tacit perspective
on the oil and gas industry's growing natural resources phenomenon. We've witnessed
how the oil activity is boosting the local economy with solid-paying jobs,
a healthy housing market and strong consumer sentiment, as oil giants such
as Schlumberger and Halliburton take a bigger stake in the area.

After seven long decades of importing oil, the U.S. seems only a few years
away from reversing the flow, largely from shale technology not only in Texas
but several areas around the country. In 2005, the U.S. reported net imports
of 13.5 million barrels per day, or almost two-thirds of its oil needs, according
to Raymond James. By the end of 2012, net imports are projected to fall to
8.6 million barrels per day, which is about half of the country's current consumption.

By 2020, the estimated gap between supply and demand narrows considerably.

Production has been growing at such a steady pace in recent years that Credit
Suisse says the U.S. should see the largest growth of crude oil than any other
oil producing country by 2015. An anticipated growth capacity of nearly 4 million
barrels per day in the U.S. is three times more than Iraq, and almost four
times more than Brazil, Canada and Russia.

2012 might be the year that the world fully realizes the significant contribution
North America has made to the overall global oil supply, especially after the
International Energy Agency (IEA) claimed that the U.S. would surpass Saudi
Arabia as the largest oil producer around 2020.

The U.S. output expected by 2020 amounts to more than 10 percent of what the
IEA says will be the world's daily oil requirement of 96 million barrels per
day by 2020. This compares to a consumption of 87.4 million barrels per day
today. And, when you factor in the expected decline of about 10.5 million barrels
per day from the mature fields around the world, North America's success in
this area is significant to global supply.

In addition, new discoveries of oil have led to disappointing results. There
was high hope that a small group of countries--Brazil, Russia, Iraq and Kazakhstan,
or the BRIKs--would "redraw the world's oil map by boosting their production
over the next two decades," says the Financial Times. However, the newspaper
reported that Kashagan field in Kazakhstan, "the biggest oil discovery in nearly
four decades," will finally begin pumping next year after several delays. Its
anticipated flow is about 150,000 barrels per day, then rising to 350,000 barrels
a day, but those figures are way below the maximum pumping target of 1.5 million
barrels a day.

Yet century-old legislation may be the biggest obstacle to the U.S. becoming
a card carrying member of OPEC. Around the time when Henry Ford was selling
his Model T to millions of Americans, the government passed the Minerals
Leasing Act of 1920, dictating that all U.S. crude exports must get approval
from the government before proceeding. At the time, the country had net imports
of about 300,000 barrels of oil a day.

Since the 1940s, the U.S. hasn't had to worry about what to do with excess
barrels of oil. With the rising use of oil, the country increasingly consumed
more of the commodity than it produced. However, over the years, certain types
of exports have been allowed, including exports to Canada (not including the
crude from the Trans-Alaska Pipeline System, which has other restrictions),
exports from Alaska's Cook Inlet, re-exports of foreign origin crude, and exports
made under international agreements, says Raymond James.

But other exports are only permitted on a case-by-case basis as they are more
dependent on what the government believes is in the nation's best interest.
Beyond what's written in the rule books, "there are political overtones to
anything that entails presidential discretion," says Raymond James. The firm
compares potential oil exports in the future to the experience of natural gas
exports today, noting that "utility and manufacturing trade groups are actively
lobbying against U.S. liquefied natural gas export permits because, of course,
any such exports would incrementally raise domestic gas prices."

In the spirit of economic nationalism, Raymond James believes that "as applications
for crude export permits become more common, we would anticipate opposition
to emerge, which means that the newly reelected Obama administration will probably
suffer political backlash if it signs off on increasing exports of U.S. crude."

The backlash that would result is likely because there is a common misperception
between exporting crude and the price of a gallon of gasoline at the pumps,
which is based on the Brent price of oil. "The irony here is that U.S. consumers
pay a global price for gasoline, and exporting U.S. 'land-locked' light sweet
crude would actually help push down the global price of gasoline," according
to Raymond James.

"Keeping the 'land-locked' crude in the U.S. does nothing to help domestic
consumers, but as we all know, politics and reality can be very different things," says
the research firm.

If Washington prevents oil from leaving the country, the likely outcome is
that barrels will begin stacking up in the Gulf Coast area. With the significant
growth from areas such as the Bakken, Eagle Ford and the Niobrara Formation
in Nebraska, Bank of America Merrill Lynch estimates that by 2017, refiners
will likely be "saturated with light oil."

How do investors benefit in the near term? Look to U.S. oil refiners,
especially those with mid-continent exposure such as HollyFrontier (HFC) and
Phillips 66 (PSX), which stand to benefit from these rising trends in production.
Refiners have two distinct advantages that help them bring in more profits.
One is the fact that the price of WTI oil has been trading at a discount to
Brent. In 2012, the spread between WTI and Brent averaged about $17 per barrel.
Domestic refiners have access to less expensive crude and benefit from the
price differentiation as its refined product is priced closer to Brent. The
other big advantage for U.S. refiners is record low prices for natural gas,
a commodity used in large quantities by refineries.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors,
Inc., which manages a diversified family of mutual funds and hedge funds specializing
in natural resources, emerging markets and infrastructure.

The company's funds have earned more than two dozen Lipper Fund Awards and
certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing
global natural resources fund in 2010. In 2009, the World Precious Minerals
Fund (UNWPX) was Lipper's top-performing gold fund, the second time in four
years for that achievement. In addition, both funds received 2007 and 2008
Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a
leading publication for the global resources industry, and he is co-author
of "The Goldwatcher: Demystifying Gold Investing."

He is also an advisor to the International Crisis Group, which works to resolve
global conflict, and the William J. Clinton Foundation on sustainable development
in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator
on financial television. He has been profiled by Fortune, Barron's, The Financial
Times and other publications.

Please consider carefully a fund's investment objectives, risks, charges and
expenses. For this and other important information, obtain a fund prospectus
by visiting www.usfunds.com or by calling
1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed
by U.S. Global Brokerage, Inc.